Q1 2021 HNI Corp Earnings Call
Sure.
Good day and thank you for standing by welcome to the <unk> Corporation first quarter fiscal 2021 conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your speakers today, Matt Mccall. Please go ahead.
Thank you.
Yeah.
My name is Matt Mccall on Vice President Investor Relations and corporate development for <unk> Corporation. Thank.
Thank you for joining us to discuss our first quarter fiscal 2021 results with me today are Jeff Lawrence <unk>, Chairman President and CEO.
And Marshall bridges, senior Vice President and CFO.
Copies of our financial news release earnings presentation, and non-GAAP reconciliations are posted on our website.
Statements made during this call that are not strictly historical facts are forward looking statements, which are subject to known and unknown risks.
Actual results could differ materially.
The earnings presentation posted on our website includes additional factors that could affect actual results. The corporation assumes no obligation to update any forward looking statements made during this call on.
I'm now pleased to turn the call over to Jeff Lawrence or Geoff.
Good morning, and thank you for joining us this quarter. Our members again demonstrated much on what is unique about each ni.
We delivered substantial profit improvement showing the power of our diversified revenue streams, our ability to react quickly to changing market dynamics and our <unk>.
Strong operational capability.
As we look to the remainder of 2021 and beyond I am increasingly optimistic about our enhanced competitive positions and ability to drive profit growth.
We have two differentiated business segments, well positioned to benefit from a recovery of the cycle multiple secular trends and numerous <unk> specific growth initiatives.
We have a track record of effectively deploying capital driving annual productivity and cost savings and clear opportunities to drive shareholder value.
On today's call I will cover three highlights of the first quarter I'll go into each in more detail on a moment, but in summary, they are first our residential building products segment.
Is hitting on all cylinders and we expect a strong performance to continue.
Second demand and workplace furnishings, while down versus last year is recovery.
And third our incremental profit margins in the first quarter demonstrate the strength of our model.
After covering the detail of those highlights Marcia will then provide some color around our second quarter outlook.
I'll conclude with some general comments finally, we will open up the call to your questions.
The first highlight is profit and our residential building products segment nearly doubled from year ago levels.
Our members responded to stronger than expected demand, while maintaining our high levels of service and delivered strong incremental profit with.
We generated 37% year over year revenue growth in the first quarter or 39%, including the impact of acquisitions opt.
Operating margins in this segment expanded 600 basis points from prior year levels, which drove year over year operating income growth of more than 90% in the quarter.
Remodel retrofit sales grew 55% versus the prior year as we continued to capitalize on strong activity in this market drive our growth initiatives and leverage our supply chain strengths.
New construction sales were also strong growing 24% year over year on an organic basis.
Again, our value propositions growth initiatives and supply chain strength continue to resonate with homebuyers and builders.
As the first quarter progressed activity accelerated as a result, our first quarter growth rates in this segment were higher than we expected specifically.
Specifically normalized orders grew at a 40% year over year rate in the first quarter and strengthened as the quarter progressed.
As we look forward, there's a lot to be optimistic about.
We have a strong competitive position.
Our vertically integrated business model unmatched product depth and pricing breath strong builder relationships and regional distribution infrastructure all provide differentiation for this business.
We are currently benefiting from our historically strong housing cycle supported by long term demographic trends and are persisting housing supply demand imbalance.
We're also seeing secular support tied to nesting and day urbanization trends.
And we have an outstanding opportunity to grow the category in both new construction and remodel retrofit.
As a reminder, in new construction two thirds of homebuyers, you're having a fireplace is a must have feature of the home of less than 40% by one.
And on the remodel retrofit side, we estimate that less than 3% of all remodeling projects involve a fireplace.
To take advantage of these opportunities we are driving a better connection with the homebuyer and homeowner and are making investments to influence their home purchase or remodeling journey.
We continue to invest in enhanced direct and digital marketing.
We continue to partner with social Influencers and targeted media to drive overall awareness demand.
And we continue to develop visualization tools to help guide homeowners as they explore options.
By combining these new efforts with our unique and differentiated model, we're competing better than ever in this space are revenue growth and margin expansion in the quarter reflect the power of this business and make us optimistic about the future.
Our second highlight for the quarter was in our workplace furnishing segment, which is showing multiple signs of improvement.
On an organic basis net sales in this segment declined 12% and orders declined 10% versus the prior year period.
These were the lowest rates of decline since the beginning of the pandemic and orders over the past five weeks or above prior year levels.
The order improvement was led by our business focused on small to mid sized customers.
We are seeing momentum in the public sector with national suppliers dealers and in smaller markets.
We are driving growth in our e-commerce, and international businesses, which generated double digit order growth in the first quarter versus the prior year.
In contrast to those areas of improvement the contract market continues to be impacted by the pandemic.
Orders in our contract businesses were down over 20% from the first quarter 2020 levels.
As we look ahead, although conditions remain dynamic we believe we are turning the corner and workplace furnishings and expect to drive revenue growth next quarter and through the remainder of the year.
That outlook is based on the combination of our agility and our competitive position with small to midsized customers generally improving demand trends and easier comps in.
And our contract businesses, we are seeing initial signs of recovery in our preorder metrics and dealer activity. However, we expect demand from larger contract customers to recover more slowly than other parts of the business.
We believe the contract recovery depends on the timing of office reentry in major markets at that time, he remains somewhat uncertain and likely tied to vaccination rates and school re openings. Most customers continue to indicate activity will ramp sometime in late Q2 through Q3.
As a result, we expect year over year revenue growth in our contract business to accelerate in the second half of the year.
Our differentiation in workplace furnishings business model positions us well to compete as the market recovers our workplace furnishings businesses have unmatched price point breadth channel access and market reach these differentiators position us well to benefit from office reentry work from home and day urbanization trends.
As a result, we expect to continue to outperform the market.
Our third highlight for the quarter was a strong incremental margins, we reported a total company year over year incremental operating margin of 60% in the first quarter on a non-GAAP basis.
This strong performance was driven by volume leverage and residential building products the benefit of our annual cost savings and net productivity initiatives and from permanent cost actions taken last year to combat pandemic pressures.
Our first quarter incremental profitability demonstrates the long term potential of our business model.
I will now turn the call over to Marshall to provide some additional detail around our first quarter and our outlook Marshall.
Let's start with our second quarter outlook for the residential building products segment recent.
Recent order trends housing construction activity and expected benefits tied to our multiple growth initiatives. All suggests second quarter growth rates in excess of 30% from the prior year quarter.
We continue to see strong momentum with both remodel retrofit and new construction.
Let's shift to our outlook for workplace furnishings for the second quarter, we're expecting revenue growth driven by improving order trends the small to midsized customers.
<unk> sector activity and a low prior year comparable.
For the segment overall, we expect a second quarter revenue growth rate in the low teens on a year over year basis that gross expectation includes the impact of design public acquisition, which will add approximately two five percentage points to our second quarter growth rate in the segment.
Next let's move to second quarter profitability overall, we expect second quarter non-GAAP EPS to be up over prior year levels. Despite inflationary pressures gross investments.
In return of temporary cost actions taken in the prior year higher.
Higher volume levels, and net productivity will more than offset those headwinds. However, the mix of these factors will result in a low incremental margin for the second quarter, we do expect incremental margins and operating profit growth to accelerate nicely in the second half as workplace furnishings volume improves the anniversary our temporary prior year cost actions.
And our price increases implemented in response to recent inflationary pressures become effective.
Finally, some comments on our cash flow and balance sheet expectations.
We ended the first quarter with $176 million of total debt that was mostly unchanged from last quarter and down from $230 million in the first quarter of last year.
Our quarter, ending cash balance was $94 million, which represents an increase of $59 million from the first quarter of 2020 on.
Our gross leverage ratio of 0.9 was slightly improved from last quarter and last year.
We expect free cash flow to continue to be strong this year, which will provide ample capacity for continued growth investment dividend payments and opportunistic M&A and buyback activity.
I'll now turn the call back over to Jeff.
Before we take your questions I want to highlight our recently published corporate social responsibility report last quarter, we discussed our 2018 CSR report and our initial ESG goals.
Our new report announced multiple new targets, including among others our goals to achieve 100% supplier compliance with <unk> code of conduct by 2022. This includes requirements related to ethical and sustainable materials sourcing.
To use 100% recyclable packaging by 2025.
To achieve zero waste to landfill for all facilities by 2030.
And to reduce our energy intensity, 50% from a 2018 baseline and reduce scope three greenhouse gas emission 40% per ton of goods by 2035.
In addition, we will continue to source, 100% renewable electricity across our global footprint.
And annually, we will continue to donate 1% of our pre tax profit to improve the quality of life in the communities in which we operate.
I'm impressed by the desire of our members to enthusiastically embraced these initiatives for the betterment of the organization our communities and our world.
Let me wrap up by stating that as we look forward, we are increasingly optimistic and expect accelerated profit growth as we progress throughout the year.
We have two differentiated business segments, each well positioned to benefit from a recovery of the cycle secular trends and <unk> specific growth initiatives.
We are well positioned to grow revenue expand margins and generate and effectively deploy cash over the long term.
I'd like to conclude by stating I'm extremely proud of and grateful for the efforts of all age and I members.
We will now open up the call for your questions.
As a reminder to ask a question you won't need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Yes.
Your first question comes on the line of Greg Burns with Sidoti <unk> Company. Your line is open.
Good morning.
On the.
On the building products.
For the building products segment.
Would you characterize the growth is coming from market share gains or primarily from the larger gains or from category expansion that you've been talking about for the last couple of quarters.
Yeah, Greg Let me I'll comment on that I would say first of all just to think about the quarter. You know we had expected growth kind of in the mid 20% range and that that was consistent with our Q4 and mid quarter remodel retrofit really accelerated and orders were up 55% as I said year over year in the first quarter and it's true.
And really by two factors one our growth initiatives continue to gain traction and I'll give you couple of examples here are insert sales are up more than 80% year to date.
Website traffic awareness consideration and purchase visits are up over 60% year to date and our electric category sales are up over 100% year to date and each is tied to a specific growth initiatives that we've been we've been working on and then you know the housing and remodel markets are strong.
The inventories are low as you well know mortgage rates are hanging in there home equity, but people habit, there they've got savings and so we're.
Connecting better with homebuyers, and homeowners and taken advantage of the marketplace and on top of that you know we have a really strong model as I commented, we got great products, we've got supply chain strength, we've kept and maintained our service levels throughout the pandemic and with our vertical integration, we've really been able to service our customers and I think all that combined.
Is what's driving the growth.
Okay, Great and then is there anything to quantify maybe.
How much.
Bigger than that.
Most of the category can grow if you move from two thirds attach.
From that $40, Brent to two thirds of tablet and the <unk>.
New construction market like what what each maybe percentage point.
Equals in terms of maybe revenue potential or market expansion.
Greg you know over the long term, if we were able to move from less than 40% of homeowners.
Putting in a fireplace in new construction to that 66 or 67% debt well. This is a much have feature that'd be worth like 50, 60 points of growth for the industry as well as us.
So it's very meaningful it's going to take some time to get there though.
Okay, alright, great. Thanks.
And then.
On the <unk>.
On workplace side is this like kind of typically what you see coming out of a recession you know the the supplies the F N b.
Moving on then you use the.
The contract piece following suit is just kind of.
Following that to go.
Pattern, where it gives you confidence that.
You do see those.
Those contracts larger projects coming through.
You know, Greg let me comment on day, typically I am going to do with a asterix. The answer is yes, but for some of its similar and some of them maybe a little different typically we do see that because of the shorter cycle business and it comes out first in the contract market is a longer sales cycle and projects are more complex they take longer than that.
Some of this.
This recession with the pandemic is a little more unique though so I think that is some of it but it's also just you know some of the smaller businesses and smaller markets are where there's less mass transit are open.
And starting to come out sooner, so it's either coming out sooner, but maybe for a little bit different reason, but we expect that to probably operate in a similar fashion, even even with this pandemic.
Okay, great. Thank you.
Okay.
Your next question comes on the line of Reuben Garner with the benchmark company. Your line is open.
Thanks, Good morning, everybody.
Good morning.
So just a follow up on the building products.
Pete.
Beat a dead horse, but.
You guys are clearly growing faster than any other category at least on it that I know of in the building products space how much of it do you think you can attribute to the fact that you guys have been able to execute and have the product available versus maybe some other categories or your competition and do you feel like your competition is getting back to the point where they are.
<unk>.
On their factories and their supply chains efficient enough to participate in the growth going forward or do you expect to continue to kind of pick up share.
From from some of the same.
The same reasons that you have over the last several quarters.
Well that's debt Ruben.
Good question I think that our model is going to continue to perform well that's why we're so optimistic.
It's a little tough to figure out how much is share gain we do believe there is there's definitely share gains there I can't really speak to the competition.
And where they're at in their cycle, but their supply chains and kind of their operational model, but I can tell you we feel really good about our ability to continue to capture market you.
You know as this goes forward just given our operational model.
Maybe a follow up like some.
Some of those growth initiatives that you mentioned like the inserts on an electric or are you guys kind of <unk>.
First movers or do you have an advantage in those spaces are your products better and that's why you're growing faster or do you think the whole category is seeing you know.
The substantial growth in those.
Areas as well.
Oh, I think a lot of this is unique to us Rubin.
Honestly the insert sales that's one of our early growth initiatives, a little more mature than some of our other ones and we're definitely seeing momentum there.
On the website traffic is absolutely unique to us and yes, we're definitely driving awareness consideration efforts their electric fireplace is probably an emerging category, but I think we're probably doing better than most of the growth rates that are that Jeff mentioned earlier up a 100% year to date.
It's important to note that these are all very important growth initiatives theyre not terribly large categories right now, but there but.
Categories that can be really large as we move forward to try to.
You know grow the category and penetrate more of the remodeling activity.
Got it.
And then on on the workplace side.
Are you seeing the same kind of trends in small businesses versus contract in in each of your geographies in other words in like New York and L. A are the smaller businesses, maybe returning to the office faster because it's just easier to get a small office opened up than it is for you know a big Fortune 500 company to move.
That.
That quickly or is it also are you also benefiting from the markets where you're.
Geographical markets, where you guys are stronger in some markets that have opened up faster.
Yeah, I think that that's a good question I think that.
I would probably lead with.
Did your geographic locations in New York, So you know probably.
New York, New York is a little unique but.
Any major metro with mass transit is still kind of locked up even on the smaller to mid size. So this is probably a little bit more geographic driven based on what we look at.
Perfect very helpful I'm going to sneak one more and yet you called out investment.
In the press release is a reason or are you now.
Relative to the year ago period, any way to quantify what how much you're investing there how much of it is in building products and.
Some of the things that you talked about already versus maybe in workplace and it fits in workplace, what what sort of investments are you, making there.
Yes, Reuben this is the continuation of investments that we've been making for the last couple of years, we're continuing to add to that ramped them up on mobile.
Half of our investments are going into residential building products.
And the other half workplace furnishings. The categories are the same it's digital and data analytics.
Its new product.
And our efforts to grow the category on the hearth side, which are pretty broad.
For the year, you know, we're probably looking at like $15 million to $20 million of incremental investments.
Your next question.
Yes.
Your next question comes from the line of Kathryn Thompson with Thompson Research Group. Your line is open.
Hi, Thank you for taking my questions Good day.
First focusing on your residential side of the business and with Hearts.
So much focus on outdoor living could you give any color on orders or replacement products and outdoor living spaces and how those how have those orders trended versus kind of the more standard indoor options to release any other way you can frame up the opportunity with a focus on that to liberty.
Yeah.
You're on your in residential right Kathryn.
Yes, yes.
Some it's emerging it's a small piece of our business, but the orders are are good.
And that's another area that where we're looking to expand in.
Yeah.
Have you sized up what that opportunity could be.
Not really not not not not totally because it's so dynamic right now I mean, there's a lot of.
Focus there.
So we're just we're just trying to kind of keep up with the piece of the business. We do have but I think there's definitely a longer term.
Play in the outdoor space that.
We can be take advantage of but we're still we don't have a we don't have a target on the on what the.
Market opportunity is just yet.
Okay.
In the in your workplace segment margin.
Like I say, it's good to see better relative trends.
Sequentially improving.
On the last couple of quarters.
And I wanted to dig a little bit more into E. Commerce, one how much of the acquisition of design public group.
Did that help ecommerce sales specifically in the quarter.
And no debt contract is lagging but are you seeing any shift there.
Your contract purchases going through e-commerce.
And in general just kind of how we should think in size the e-commerce opportunity.
On fundamental changes in a post COVID-19 world.
Well Catherine debt.
Simple answer to design public it added approximately $6 million of revenue to the first quarter, we're expecting to add $40 million to $45 million for the full year. So we're very excited about the integration and we're seeing lots of opportunity.
And it's somewhat complementary to contract I don't know that it's a substitute I think that youre kind of alluding to just yes, theres still a lot of complexity in the you know when you're doing a large office.
Is it a little challenging to do 100% through e-commerce, but it can definitely be complementary and additive.
Well and I guess that is kind of that debt.
And very helpful. Marshall I guess it speaks to the hit the bigger change you're seeing more complementary melting vs.
Sure contract, but the melting of the e-commerce with the traditional.
And it was really just getting a better sense of how you see that in the world are you seeing any trends from designers more consistently.
Splitting up orders because that's going to change your growth trajectory and how we think about modeling e-commerce going forward if that makes sense.
Yeah, I know, what you're getting at I think Kathryn we haven't really seen that yet I think that's a rational possibility down the road, but right now we haven't seen.
It's early days I think the most of the E com, we've seen as work from home kind of Standalone.
As it relates to contract product, maybe going into the home, but as far as kind of processing.
The two combined you know I think people are still heads down trying to figure out.
How they want to come back to the the office, whether it's 50% time or 75% time and really get the the main office Rolling first and then that opportunity or theory would probably come into play you know in kind of the later middle innings. After things are kind of back up and running.
Okay and final question is on supply chain, which has been a focus.
And the construction industry in general.
And also reported that the Texas fees in the quarter.
If you could give color on basic raw materials or any any categories that.
Or be impacted with.
U S steel.
We're even hearing your thumb force team has also been tough to come by.
But just being able to flesh out how you feel you are with your supply chain and the impact now and.
What you see going forward. Thank you.
Yes.
Youre, absolutely right I think the supply chains.
For most manufacturers and in a lot of categories are tight I think the you know.
Pricing, our inflation costs, but we've been able to maintain most of the categories pretty well. The foam is unique you are correct. We have seen we're on some allocations on phone right now.
We do see that recovering, but it's been it's been a challenge in the soft seating category specifically.
Ben in Ocean freight than you know the general logistics.
For the supply chain has been constrained a bit as well and tight but so far our teams have worked through it and we've been able to.
Maintain.
Maintain lead times at this point other than a slight bumps in the film area.
Okay, great. Thanks very much.
Thank you.
There are no further questions at this time I will now turn the call back to Mr. Lawrence <unk> for closing remarks.
Great well, thanks, everybody for your interest in H and I and thanks for joining us today have a great day.
This concludes today's conference call you may now disconnect.
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